Mutual Funds|Rebuilding Infrastructure May Be Profitable for the Very Rich

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Rebuilding Infrastructure May Be Profitable for the Very Rich

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Workers laying a water pipeline in Lapeer, Mich. Most drinking-water and sewer systems are government-owned and some are privatizing, said Randle Smith of the Virtus Global Infrastructure fund.CreditCreditSean Proctor/The Flint Journal-MLive.com, via Associated Press

By Norm Alster

Jan. 13, 2017

President-elect Donald J. Trump has spoken of spending a trillion dollars over the next decade to rebuild and repair the nation’s sagging infrastructure. Apart from offering big tax breaks to participating developers, few details of the Trump plan have emerged.

But a trillion dollars is hard to ignore, and investors looking to profit have numerous infrastructure mutual funds and exchange traded funds to choose from, though all of them have certain drawbacks.

For one thing, most infrastructure funds own assets of limited scope, such as utilities, pipelines and railroads. “That doesn’t capture the full scope of infrastructure investment,” said Peter Santoro, lead portfolio manager for the Columbia Global Infrastructure fund.

Mutual funds and exchange-traded funds (E.T.F.s) are unlikely to own United States roads, bridges and airports, which are typically owned by states and municipalities. “None of these assets are publicly traded,” said Randle Smith, co-manager of the Virtus Global Infrastructure fund.

Where there is private ownership of such assets, they are most often owned by private equity funds, said Matt Landy, a portfolio manager with Lazard Global Listed Infrastructure Open fund, so investors in publicly traded mutual funds and E.T.F.s don’t have access to them.

Fund and E.T.F. ownership of utilities poses another problem. Utilities are not expected to benefit directly from the kinds of tax breaks that Mr. Trump’s advisers have advocated, according to several fund managers. Worse still, utility stock prices typically fall when interest rates rise. With wide anticipation of continuing Federal Reserve moves to lift interest rates and with bond yields rising, utility stocks have lagged.

Because of this, infrastructure E.T.F.s, which typically own utilities, rose sharply earlier this year, peaked in September and have been listless, falling with bond prices despite the broader stock market rally since. The SPDR S&P Global Infrastructure E.T.F., heavily weighted in utilities, rose sharply for the year through Sept. 8, but declined in value through the end of the year.

Utilities had become “very overvalued,” said Tayfun Icten, a Morningstar analyst. “We might have a deeper sell-off in utilities,” he added. Mr. Icten advises a cautious approach to investors considering infrastructure funds or E.T.F.s.

Mr. Landy of Lazard issued a similar warning. “At this point you have to be very selective,” he said.

Still, several fund managers insist their holdings are likely to benefit from an eventual Trump infrastructure program. Mr. Santoro, manager of the Columbia fund, says investors don’t need to own roads and bridges. They can own the concrete manufacturers who will supply developers. He cites two of his fund’s holdings, Eagle Materials and Cemex.

Lead contamination in the water system of Flint, Mich., has sharpened focus on the need for upgrading water systems. Most drinking-water and sewer systems are government-owned but “in contrast to roads and airports, water public entities are privatizing,” said Mr. Smith of Virtus.

Many infrastructure portfolios have also loaded up on energy pipelines, which seem likely to benefit from Trump policies. Scott Hammond of the Guggenheim World Equity Income fund expects the resumption of some projects that have been long and bitterly opposed by environmentalists, such as the Keystone XL and Dakota Access pipelines. And as pipeline capacity is increased to bring domestic shale oil to ports for export, companies like Kinder Morgan should profit, he added.

Mr. Santoro said the Columbia fund owned the oil service giants Schlumberger and Halliburton “because they have the engineering and construction expertise that’s needed.”

Railroads will also almost surely benefit from any uptick in economic activity set off by infrastructure spending. CSX, Norfolk Southern and Union Pacific are three of the largest holdings in the Lazard fund.

Some value-conscious infrastructure investors now favor Europe. “We’ve been concerned about North American infrastructure valuations for several years,” said Mr. Landy of Lazard. “North American infrastructure assets look expensive, particularly utilities.” European infrastructure assets are “trading at a big discount,” he said.

Passive investments like index mutual funds and E.T.F.s (which for the most part also track market indexes) have generally outperformed actively managed investments in recent years. But actively managed funds can avoid the utilities that are being hurt by rising interest rates and that are prominent in indexes tracked by broad infrastructure E.T.F.s. “Rising rates provide an opportunity for actively managed funds,” Mr. Hammond said. Actively managed funds can also hunt for assets that will most directly benefit, if and when details of a Trump infrastructure plan emerge.

But the reality is that private equity funds for wealthy investors may be best positioned to take advantage of future tax breaks. For one thing, they have the capital. And where roads are now in private hands, private equity funds are typically the owners, so they can make the tax-advantaged repairs and recover their investment with tolls.

How good all of this will be for the general public remains to be seen. Some critics have questioned whether private developers would undertake needed public-interest projects that do not offer the prospect of profit. And on projects that do offer profit, ordinary people may end up footing the bill.

“Trump might dispute that his plan would require raising more in taxes,” said Hunter Blair, federal budget analyst with the liberal Economic Policy Institute, “but it will certainly cost money through tolls and other user fees.”

A version of this article appears in print on , Section BU, Page 14 of the New York edition with the headline: Infrastructure Dollars Might Divert to the Very Rich. Order Reprints | Today’s Paper | Subscribe